Anticipate hefty health care costs in retirement

Published: 20 May 2012 11:29 PM

For most people, their biggest fear about retirement is running out of money before they run out of life.

The biggest culprit for that? Health care costs.

A recent survey by Nationwide Financial found that almost half of soon-to-be-retired, high-net-worth Americans say they are “terrified” of what health care costs may do to their retirement plans. And nearly 3 in 4 said having health care costs go out of control is among their top retirement fears.

“Americans — even those who have diligently saved for their golden years — are not prepared for the reality of health care costs in retirement and don’t really understand how Medicare works,” said John Carter, president of Nationwide Financial Distributors Inc. “Too many assume their employers will continue to pay their premiums during retirement or Medicare will cover all health care expenses.”

Nationwide’s online survey was conducted Jan. 3-19 among 625 adults ages 55 and older having $250,000 or more in household assets who plan to retire by 2020, and among 625 retired adults ages 65 and older having $250,000 or more in household assets.

Looming health care costs in retirement can spook even the most financially secure among us.

“Many people who approach retirement are amazed and appalled at the cost of insurance,” said Thomas Murphy, certified financial planner at Murphy & Sylvest LLC in Dallas. “They do not realize the vast majority of all health care expenses incurred in America are for people over the age of 65, and someone must pay the bill.”

According to Fidelity Investments, a 65-year-old couple retiring this year will need about $240,000 to cover their medical expenses throughout retirement. That’s up 4 percent from last year, when the estimate was $230,000.

The estimate assumes that you don’t have employer-provided retiree health care coverage, but that you are eligible for Medicare. It also assumes average life expectancies of 17 additional years for men and 20 years for women.

“Medical inflation is outpacing salary increases and cost-of-living adjustments for many people,” said Brad Kimler, executive vice president of Fidelity’s benefits consulting business. “Until that situation changes, it is critical that individuals include health care costs in their retirement savings strategies today so they can be prepared to pay their medical bills throughout retirement.”

There are a few steps you can take now:

Postpone retirement — Wait until you’re 65, the age you’ll be eligible for Medicare.

“People today, unless they’ve saved a lot of money, have to come to the realization that they’re going to have to work longer than they anticipated working, and they certainly have to save money,” said David Weber, president of Uniplan Financial Services in Dallas.

Even when you’re on Medicare, you’ll still have to pay some costs.

“Part B requires an annual premium payment based on your income and covers physician expenses and out-of-hospital costs,” said Murphy. “Part C is an HMO form of Medicare. Part D requires premium payments and covers prescription medications.”

Many seniors find Medicare Advantage plans to be a strong alternative to the traditional Medicare program.

The plans are essentially a private version of Medicare. Instead of paying beneficiaries’ claims directly, the government pays insurers to oversee the health care of seniors and people with disabilities.

Open a health savings account — “It’s the only vehicle of its kind,” said Sunit Patel, a senior vice president in Fidelity’s Benefits Consulting Group, “where the money going in isn’t taxed, when it’s accumulating, it’s not taxed again and when it comes out — when it’s used for medical expenses — it’s not going to get taxed.”

Anticipate health care needs in retirement — “We think for some individuals, setting a goal, not just for retirement savings, but maybe within that, think about, ‘What am I going to need for health care specifically?’” Patel said.

That includes long-term care needs. “Almost everybody is going to have a need for some long-term care,” Weber said.

Stay healthy — Exercise, eat right and stick to your treatment plan if you have a chronic condition. That’s all easier said than done, but it can make a difference.

Planning now for health care in retirement can save you a lot of heartache later.